Question 1

Describe the differences (in sign and relative magnitude) between the government purchases multiplier and the tax multiplier.

Accepted Answer

The answer of Describe the differences (in sign and relative...

Question 2

Raising taxes on interest and dividend income will increase the level of investment and economic growth.

Accepted Answer

A) True 
 B)False

Question 3

During the twentieth century, the largest budget deficits as a percentage of GDP occurred

Accepted Answer

A)  during the 1990s. 
B)  during the 1980s. 
C)  during the Vietnam war. 
D)  during World Wars I and II.

Question 4

The growth rate of hours worked depends on all of the following except

Accepted Answer

A)  the rate of population growth. 
B)  changes in the employment-population ratio. 
C)  changes in the hours each employee works. 
D)  changes in the worker-to-retiree ratio.

Question 5

The larger the marginal propensity to import, the larger the government purchases multiplier.

Accepted Answer

A) True 
 B)False

Question 6

Suppose the president is successful in passing a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP?

Accepted Answer

A)  There is a $50 billion increase in equilibrium GDP. 
B)  There is a $50 billion decrease in equilibrium GDP. 
C)  There is a $40 billion increase in equilibrium GDP. 
D)  There is a $40 billion decrease in equilibrium GDP.

Question 7

Table 27-4
 
-Refer to Table 27-4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if Congress and the president do not use fiscal policy. If Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2019, which of the following will be lower than if Congress and the president had taken no action?

Accepted Answer

A)  real GDP and the unemployment rate 
B)  real GDP and the inflation rate 
C)  real GDP and potential GDP 
D)  potential GDP and the inflation rate

Question 8

The crowding out of private spending by government spending will be greater the

Accepted Answer

A)  less sensitive consumption, investment, and net exports are to changes in interest rates. 
B)  more sensitive consumption, investment, and net exports are to changes in interest rates. 
C)  less sensitive consumption, investment, and net exports are to changes in the price level. 
D)  more sensitive consumption, investment, and net exports are to changes in the price level.

Question 9

Consider a tax cut which affects not only consumer disposable income, but also after-tax earnings from labor supplied to labor markets and from financial assets acquired through saving. In the long run we would expect this tax cut to

Accepted Answer

A)  decrease the price level and increase the level of real GDP. 
B)  increase both the price level and the level of real GDP. 
C)  decrease the level of real GDP. 
D)  decrease the price level.

Question 10

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should

Accepted Answer

A)  lower taxes by an amount less than $500 billion. 
B)  raise government purchases by $500 billion. 
C)  raise government purchases by more than $500 billion. 
D)  lower taxes by $500 billion. 
E)  lower government purchases by $500 billion.

Question 11

Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman. If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman.

Accepted Answer

The answer of Suppose Political Party A proposes a tax...

Question 12

Figure 27-9 
-Refer to Figure 27-9. Given that the economy has moved from point A to point B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

Accepted Answer

A)  increase taxes 
B)  increase government spending 
C)  decrease the money supply 
D)  increase interest rates

Question 13

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 14

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.

Accepted Answer

A)  decreasing; increasing 
B)  decreasing; decreasing 
C)  increasing; increasing 
D)  increasing; decreasing

Question 15

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 16

What is the difference between fiscal policy and monetary policy?

Accepted Answer

The answer of What is the difference between fiscal policy...

Question 17

Expansionary fiscal policy

Accepted Answer

A)  can be effective in the short run. 
B)  causes complete crowding out in the short run. 
C)  is never effective because of crowding out. 
D)  can be effective in the long run.

Question 18

Economists who believe the supply-side effects of tax cuts are small essentially believe that

Accepted Answer

A)  tax cuts mainly affect aggregate demand. 
B)  tax cuts mainly affect aggregate supply. 
C)  tax cuts will increase the quantity of labor supplied. 
D)  tax cuts will result in relatively small changes in the price level.

Question 19

Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate equals 0.2, and the marginal propensity to import equals 0.05.

Accepted Answer

The answer of Calculate the value of the government purchases...

Question 20

The use of fiscal policy to stabilize the economy is limited because

Accepted Answer

A)  changes in government spending and tax rates have a small effect on aggregate demand. 
B)  changes in government spending and tax rates have a small effect on interest rates. 
C)  the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. 
D)  the Internal Revenue Service (IRS) resists changes in tax rates because of all the changes they would have to make to the tax code.

Exam 27: Fiscal Policy